Taking the Guesswork Out of Liquidity Buffers

Setting up a cash buffer can be a vital part of liquidity planning, but the difficulty in knowing precisely how much to set aside can lead to cautious over-estimation, despite the inefficiency of doing so. Is it simply better to be safe than sorry, or can technology be used to reduce or even remove the need for buffers? TMI explores the options.

Cash buffers seem like the only practicable way to mitigate the risks inherent in an unstable trading and market environment. Yet every treasurer understands the potential inefficiency of holding ‘just in case’ cash. So is there a more effective means of calculating and holding buffers while keeping risk under control?

In practice, the need for a buffer is relative to each company’s cash position, says Hubert Rappold, Chief Sales Officer, Nomentia. “For companies that are already cash rich, just having a stand-by credit facility may be sufficient, then they could place their excess cash in longer-term investments with better interest rates because a real cash buffer in the current inflationary environment will be losing its value quite drastically over time.”

Many of the companies Nomentia works with try to avoid having cash buffers, instead focusing on “really accurate cash flow forecasting” and then seeking “the best possible horizons” for placing cash in short-, medium-, and longer-term deposits with their banks or other financial providers.    

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